Portfolio structure. The basics: Diversification

Having clearly set up your goals and limitations we can now start by inspecting your list with the trading candidates.
Your traders’ pool.
How many should you add and most importantly which of them?
This is where the second principle falls into place. 

This is easily explained but in order to implement correctly, it requires long-term investing experience and knowledge.
Diversification is the weighted allocation in a wide variety of products and investment decisions where risk is spread across the board and no financial instrument can sincerely affect your MaxDD % on its own.
Proper diversification can and should lead also to dynamic hedging.
As dynamic hedging we define, the co-existence of two or more products that due to their correlation they hedge one another in open PnL.
This could smooth out a lot of your equity’s floating drawdown periods.

 dynamic hedging
Randomized data of a hypothetical reverse correlated two pair hedged portfolio.

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But how can you set up a well-diversified portfolio with traders?
There are four major different ways in which a trader’s selection should happen.
You should choose strategies that:

a. Have a different timeframe/session trading execution. This by its own means that traders with different time zones will have different trades even if they trade the same financial instrument.
b. Trade a different product. This is self-explanatory. However, you should be careful as many products have strong correlations (Yen pairs, Aud/Usd with Xau/Usd, Usd/Cad with USoil e.t.c)
c. Trade-in separated Markets. While correlations exist also there, the magnitude is much lower.
d. Utilize a different position sizing technique. Hard stop loss, martingale, the grid are some of many ways that a trader can manage his/her position and all of them offer a variety of results.

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Bonus: This is more advanced, but you can also try to track each system’s drawdown cyclicality. Selecting strategies that experience their MaxDDs in different time periods could make a huge difference to your overall drawdown (provided that this cyclicality is valid).


That was all from the Diversification principle. In our last chapter, we will study the Rebalancing aspect of a portfolio and its most vital features.

More to come… Stay tuned!


The views expressed do not constitute investment or any other advice /recommendation /suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in the report do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade.
Every metric and the statistical number is a result of a past performance, which does not constitute a promise or a certainty for a future one.